A taxpayer with a 98% shareholding in a joint stock company, CH AG, based in Switzerland had provided EUR 30 million as an interest-free shareholder loan to the company. There was no written agreement. CH AG used this capital to provide loans to two affiliated companies in Austria and Germany, each with an interest rate of 2%. The tax authorities added a 2% interest to the the shareholder loans – based on the interest on the loans passed on by CH AG to its affiliated companies. EXCURSION: In the present case, the argumentation of the taxpayer or the tax representative against interest on the loan was also interesting: In the complaint – with reference to the so-called “relatives’ case law” – it was stated that due to a lack of sufficiently clear agreements, lack of collateral, etc., not at all a “loan” in the tax sense is to be assumed, but that the financing in question is rather a question of equity-replacing grants ( hidden deposits ) and therefore no interest rate is justified. In the preliminary appeal decision, the tax authorities replied that the nature of the loan could very well be derived from various documents and information (probate proceedings and accounting treatment at CH AG). OneIn addition, reclassification of the loans in question as hidden contributions or hidden share capital is only permissible under “ special circumstances ”, with reference to the relevant case law. In the opinion of the tax authorities, this question did not arise in the present case because CH AG did not have any financial difficulties at the time the funds were injected and had sufficient equity capital. Judgement of the Court The court found that the shareholder loan was not covered by the scope of the Austrian arm’s length provision which requires the existence of a domestic company or a domestic permanent establishment and is therefore only relevant when determining business income. If no interest has actually accrued, no fictitious interest can be subject to taxation for such an interest-free shareholder loan. The question of whether the amounts given were actually loans or (hidden) equity was left undecided by the court. Click here for English translation Click here for other translation ...

The application of the WEV (waarde in het economische verkeer) rule is particularly relevant if the non-corporate loan is interest-free or the agreed interest is owed. The interest to be taken into account for tax purposes is then determined on the market value of each interest period at the time it falls due. The assessment of the business nature of the money supply can take place both at the time of supply and during the term. This test must be carried out on both sides, from the perspective of the lending and borrowing company. Referring to what has been said above with regard to the perspective of the entities involved, a situation of an affiliated lender granting a loan to the borrowing group entity that subsequently is insufficiently creditworthy may also constitute a ‘non-business loan’ in the approach of the aforementioned judgment. In my opinion, the same applies to the borrower who, as a result of the linked intra-group loan, sees his creditworthiness drop to a level below BBB-. The Supreme Court considered that the level of interest on a ‘non-bankrupt loan’, a loan with a non-bankrupt default risk, should be determined by reference to the creditworthiness of the lending entity. The Supreme Court did not explain in its judgment how to deal with the creditworthiness of the lending group entity compared to the creditworthiness of the borrowing entity. In case of a higher creditworthiness of the lender compared to the creditworthiness of the borrowing entity, the interest rate that would be charged by the lending group entity itself will be considered as the appropriate interest rate to be taken into account for tax purposes. If the lending group entity does not have a better credit rating than the borrowing group entity, i.e. if it is not itself investment grade, the notional guarantee does not, in principle, add anything. In that case, no more than the risk-free interest rate on the loan can be taken into account. English translation of the opinion issued by the Attorney General – I recommend that the appeal in cassation is declared to be unfounded Judgement of the Supreme Court The Supreme court decided against the opinion of the Attorney General and concluded that the appeal of X B.V was well founded. Click here for English translation Click here for other translation ...

“X Beheer B.V.” was founded in 1992 and has been part of the A-group as a holding company ever since. The shares of “X Beheer B.V.” were transferred against the issue of depositary receipts to a trust office foundation. The depository receipt holders of “X Beheer B.V.” were also holders of the depository receipts of shares of F B.V. (hereinafter: F), formerly the holding company of the A-group. In 1995, a reorganisation took place as a result of the wish of a number of depositary receipt holders to dispose of their interests in F and “X Beheer B.V.”. However, the remaining group of depositary receipt holders did not have the financial means to buy out those depositary receipt holders, after which it was decided to establish the (take-over) holding company G Holding B.V. (hereinafter: Holding). The intention was that G Holding B.V. would gradually buy up packages of depositary receipts from depositary receipt holders who wished to sell. After four transactions, at the end of 1997 G Holding B.V. held 278 depositary receipts for shares in “X Beheer B.V.” (23.16%) and 38 depositary receipts for shares in F B.V. (7.3%). The purchases of these depositary receipts involved a total amount of Fl. 10,235,760. The purchase price was fully financed by a loan from “X Beheer B.V.” to G Holding B.V. It was intended that G Holding B.V., which had no other assets or financing, would repay the loan from “X Beheer B.V.” from a dividend stream to be generated from “X Beheer B.V.” and F B.V. The loan from “X Beheer B.V.” to G Holding B.V. was classified by “X Beheer B.V.” as a current account, to which the interest due was credited annually. The interest rate was 4.7% in 1996, 4.96% in 1997, 5.25% in 1998 and 5.63% in 2000. The balance of this loan rose from Fl. 4,526,692 at the end of 1995, through Fl. 10,717,470 at the end of 1997 and Fl. 12,509,550 at the end of 1999 to Fl. 13,213,837 at the end of 2000. During the term, a total amount of NLG 115,030 (in three different tranches) was repaid on the loan, which amount came from dividends paid by F B.V. A written loan agreement was never drawn up and a repayment schedule for the loan was never established. Collateral for the loan was neither requested nor provided. A Group’s results had been under pressure since the loan was taken out, partly due to changed market conditions, different production techniques and increasing competition. Losses were incurred in all financial years from 1996 to 2000. The total loss in these five years (commercial) amounted to Fl. 24,619,216. “X Beheer B.V.”‘s equity was negative since 1997. Partly as a result of these losses and this equity position, no dividend was ever paid from the A-group to G Holding B.V. In February 2001 “X Beheer B.V.” transferred its claim on G Holding B.V., with a nominal value of NLG 13,198,000, to F for the fair value of NLG 6,205,400. The G Holding B.V. shares were also sold for Fl. In “X Beheer B.V.”s corporation tax return for 2000, an additional provision of NLG 2,000,000 was made in respect of the loan to G Holding B.V., after a provision of NLG 5,000,000 had already been made in 1999. The tax authorities did not accept the 2,000,000 write off on the loan and disallowed the deduction. A complaint was filed by “X Beheer B.V.” which was later dismissed by the Court of Appeal. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Court of Appeal and dismissed the appeal filed by “X Beheer B.V.”. Excerpt “3.5. The Court’s opinion that an independent third party would not have taken out the money loan under the circumstances outlined by the Court is of a factual nature, and not incomprehensible in the light of the circumstances taken into account by the Court – in particular the fact that no security was requested and provided – and in view of the circumstance that Holding, which did not have any other assets or any other financing, would have had to repay the loan from the interested party from a dividend flow to be generated from the interested party, among others. It follows from the Court’s judgment that – barring special circumstances – it must be assumed that the interested party accepted the full debtor risk with the intention of serving the interest of Holding in its capacity as shareholder. The mere fact that Holding was not a majority shareholder of the interested party does not alter this. Neither the Court’s ruling nor the documents in the case reveal that any facts or circumstances have been established or put forward to justify the conclusion that special circumstances as referred to above apply in this case. 3.6. It follows from the above that the Court of Appeal has correctly concluded that the interested party may not charge the Dfl 2,000,000 write-down on its loan to Holding to its result in the year under review. The complaints directed against the opinion of the Court of Appeal mentioned above in 3.3 and its conclusion cannot therefore lead to cassation. 3.7. It follows from the above that the remaining complaints directed against the opinion of the Court of Appeal – and the further grounds given – that the provision of money by the interested party to Holding should not be regarded as a business loan, fail for lack of interest.” Click here for English translation Click here for translation ...